Merkel Makes New Enemies, This Time at Home

With her insistence on deeply unpopular austerity measures, German Chancellor Angela Merkel has won few friends in debt-laden southern European counties.

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German Chancellor Angela Merkel

Many saw in her tough stance and refusal to make concessions an unwavering commitmentto the interests of her own electorate. But suggestions that she bowed to pressure from other euro zone leaders at a key summit last week have left her with new enemies, this time closer to home.

Merkel agreed at the summit to use the euro zone’s planned bailout fund to recapitalize struggling banks as well as allow it to buy bonds of ailing euro zone countries to ensure that their borrowing costs are not driven up to unsustainable levels.

Although she denied that she had been pressured into the decision, her apparent softening was heavily criticized in Germany, and even caused her ruling coalition to wobble when the leader of her sister party protested against the decisions taken in Brussels.

Hans-Werner Sinn, the head of Germany’s Ifo Institute, one of Germany’s most influential economic research institutes, will urge other economists to join him in publicly opposing the decisions taken at last week’s summit, German magazine Der Spiegel reported on Thursday.

According to the magazine, Sinn believes Merkel was “forced” to agree to the measures at the meeting in Brussels.

He warned that the losses to the German central bank could amount to as much as half a trillion euros if the currency union imploded and told Der Spiegel: “We are trapped.”

The European Stability Mechanism or ESM is meant to have half a trillion euros at its disposal to tackle the debt crisis. Germany will contribute more than any other euro zone country to the fund

Although this is not the first time Sinn has voiced concerns over Germany’s exposure to the debt crisis, the magazine notes this is the first time he has called for action and asked other economists for support, potentially dealing a significant blow to Merkel’s reputation.

In the draft document, the economists warn against the plans to create a banking union within the euro zone, Der Spiegel said, which they considered “the final straw”.

This would amount to “collective liability for the debts of banks in the euro system,” they wrote.

EU leaders agreed to allow banks to be recapitalized via the ESM, the rescue fund which comes into force next year, without countries having to demand collateral for any bailout loans. They also agreed to create a single supervisor for the euro zone’s banks.